10/14/2011 Market Recap - Q4 Squeeze Rally Continues: S&P Up 14% in 10 Days

This week the earnings-short-squeeze rally continued requiring me to adjust the call side of the QQQ Iron Condor (details for the original QQQ opening trade and the adjustment trade contained in this week's Trading Review sent to Subscribers).

  

The other position, an Iron Condor on SPY, is set up great going into this week's OpEx despite the massive rally for the last 2 weeks.  The put side of the QQQ Iron Condor is also setup nicely.  As a result, the Oct positions should navigate OpEx well posting a nice gain for the month even if the rally continues this week.

  

I thought the rally may have legs but I admit, I am surprised it has gone this far this fast.  This rally has decimated many who were too short.  That decimation fuels a rally like this one:  A short covering rally.  This is evidenced by the long white candles on the chart reflecting opening at the low and closing at the high almost every day for the last 2 weeks; thereby racking up a 14% gain in 10 trading days.

  

I expect a little more strength in the coming week due to some big earnings releases by Intel, Apple, and other tech heavies.  However, more earnings for the financials are also due out and they will continue to underwhelm at best. 

  

Some great Nov positions are on my radar and I plan to start deploying them this week, especially if the rally continues.  This rally needs to digest itself by consolidating and backing and filling.  If it doesn't, then the higher we go the further it will fall when it begins to waiver. 

This week a new call spread was opened in XEO (the S&P 100 Index) in response to the massive rally of late.  The rally continued after the spread was opened on Tuesday. 

  

I thought the rally may have legs (but I admit I am surprised it has gone this far this fast) which is precisely why I didn't use options that expired this week.  Instead, I used options with 2 weeks remaining until expiration; this week's Weekly options did not have a comfortable enough risk/reward ratio and would have gotten annihilated (aka: huge losses) if they had been opened on Tuesday for expiration on Friday.

  

My selection of the longer term (2 week vs 1 week) options was definitely the right move.  This rally has decimated many who were too short.  That decimation fuels a rally like this one:  A short covering rally.  This is evidenced by the long white candles on the chart reflecting opening at the low and closing at the high almost every day for the last 2 weeks; thereby racking up a 14% gain in 10 trading days.

  

The XEO spread remains just below the 100 DMA and chart resistance, starting at 563, with its new closing high above the recent trading range.  A comfortable margin of safety exists before the short strike of the spread is threatened.  I expect a little more strength early in the coming week due to earnings but the market is getting way ahead of itself; aka: gone too far too fast.  I am very comfortable with the XEO spread and the conditions of the market here. 

Navigate wisely and stay profitable, my friends.  Happy trading!